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Economic overview

13 February 2012 Compiled by the Department of Research and Information

1.

HIGHLIGHTS The world economy experienced a moderation in growth in 2011 and faces serious downside potential in the year ahead. The continuing sovereign debt crisis in the Eurozone lies at the core of increasing uncertainty and heightened risks to global economic stability. The monetary unions predicament is not only limiting growth prospects in this regional bloc, but the spill-over effects through trade, investment and financial flows will be felt around the globe. Industrial output was adversely affected as economic conditions took a turn for the worse towards year-end. This was evident in Germany, France and the USA, among others, whilst in Japan and the UK industrial production contracted further on an annual basis. Within the BRICs, industrial output shrank in Brazil towards the end of 2011, whilst China and Russia experienced a slowdown, albeit still at relatively healthy growth rates. India posted a volatile trend in industrial production. Conditions in global manufacturing point toward modest growth in 2012, as recent PMI data is still below the long-term average and overall economic conditions could remain less than satisfactory for quite some time. World trade volumes slowed substantially as austerity measures in the Eurozone and lower confidence levels weakened import demand, with all major countries and regions reporting reduced growth in demand for foreign goods. Employment creation remains a key challenge for the world at large. Despite a sustained recovery over the past two years, the global economy did not manage to create sufficient new jobs. Although an encouraging employment trend has been observed in various parts of the world, the jobs shortfall has been estimated at 64 million, if world employment at present is compared to pre-recession levels. Inflation appears to have peaked towards the latter part of last year and the downward trend could be sustained. The anticipated deceleration in global growth underpins expectations of a moderating trend in commodity prices. Accordingly, inflationary pressures may be contained through 2012, although recent movements in the oil price provide reason for concern. The monetary authorities in the developed economies will be inclined to leave interest rates at historical lows for an extended period of time. The US Federal Reserve has already indicated that it could keep interest rates unchanged until late in 2014. The European Central Bank kept the benchmark rate at 1% at its early February meeting, leaving a little room for further relief should it prove necessary to prevent the Eurozone area from sliding deeper into recession. In South Africa, general business confidence has remained subdued for three quarters in a row. Sentiment among local manufacturers remains low due largely to weak external demand and intense foreign competition. Building contractors are facing persistently poor demand for their services, but retailers are relatively optimistic about trading conditions.
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Economic overview

The countrys trade account registered a large R15.1 billion deficit in 2011, a sharp turnaround from the R4.8 billion surplus achieved in the previous year. This was the consequence of a notable increase in domestic demand for imported goods, which exceeded the export performance despite a depreciating currency. The domestic economy managed to create an additional 365 000 new employment opportunities in 2011, with the largest gains emanating from financial and other business services, trade, as well as the community and social services sector. Nevertheless, job creation in South Africa has to be substantially enhanced if a meaningful dent is to be made on unemployment and poverty levels. Despite significant inflationary pressures, local interest rates are likely to be kept on hold for some time. Cost-push factors have been largely to blame for excessive price increases, particularly administered prices. However, concerned with a less than favourable growth outlook, the Monetary Policy Committee appears inclined to keep interest rates at current levels in order to support economic activity. The South African economy is expected to register a slight slowdown in growth to 2.8% in 2012, possibly accelerating toward the 3.5% level next year.

1.1. IMPLICATIONS FOR BUSINESS The global economy is facing a highly uncertain future, with the sovereign debt crisis in the Eurozone, the unresolved fiscal situation and high levels of indebtedness both in the USA and Japan, as well as decelerating growth in emerging economies, underpinning weaker prospects for world growth in 2012 and possibly in 2013. Recessionary conditions in the Eurozone (South Africas most important single trading partner, especially for our manufactured exports), point toward a very challenging year ahead for the domestic export sector. Commodity prices, in turn, are forecast to continue on a moderately declining trend. Hence, South Africas trade balance and ultimately the current account of the balance of payments are expected to come under pressure, possibly resulting in rand weakness. Consumer price inflation in South Africa is anticipated to remain above 6% throughout 2012, thereby placing upward pressure on the operating costs of business enterprises, while margins may be further squeezed by subdued demand conditions and foreign competition in local as well as global markets. Since inflation will be mostly of a cost-push nature, whilst domestic growth is moderating and employment creation remains insufficient, the Monetary Policy Committee is expected to leave interest rates on hold until Q2 of 2013. As emerging and other developing economies are increasingly becoming the engines of global economic growth, South African businesses should focus on fostering closer trade relations with these regions, including the rest of Africa. Furthermore, local businesses should position themselves to take advantage of an eventual upturn through competitiveness improvements.

Economic overview

Indeed, South African companies that are experiencing reasonable trading conditions should, if required, consider upgrading their productive capacity / investing in new technology (with the recent rand strength providing further benefits on the import front) so as to improve their global competitiveness. Since domestic consumer spending is forecast to moderate in 2012, enterprises producing goods or providing services to the local market may experience more challenging trading conditions during the year. Fixed investment activity has been showing signs of recovery, but spare production capacity and insufficient demand both locally and abroad could result in cautious private sector investment activity over the course of 2012. Excessive volatility may be experienced in equity markets during the course of the year, with implications for the JSE, which recorded surprisingly strong gains in January 2012. Heightened uncertainty could easily result in sporadic corrections, not only in equities but also in commodity markets. Portfolio adjustments due to fast changing risk perceptions versus return expectations are likely to result in substantial alterations in capital flows from time to time, leading to high volatility for emerging market currencies, including the rand.

Economic overview

2.

GLOBAL ECONOMIC CONDITIONS

The world economic recovery gradually lost steam during the course of 2011 as a combination of developments, including a deteriorating sovereign debt crisis in the Eurozone, the unresolved fiscal situation in the United States (US), as well as a slower pace of growth in many emerging and other developing economies took their toll. Conditions in the Eurozone, in particular, worsened during the year, with wide-ranging implications for the world at large. The German economy, Europes largest, reported a mild contraction in the final quarter of 2011 but is estimated to have posted a solid 3% growth of for the year as a whole. Similarly, the United Kingdoms gross domestic product (GDP) declined by 0.8% on a quarterly basis in the last three months of 2011, whilst the French economic recovery lost considerable momentum. Greece found itself in a deep recession throughout the year, whilst Portugals contraction was somewhat milder. Very marginal growth has been estimated for Italy and Spain. The US economy, in turn, expanded by 2.8%. Industrial production has come under increasing pressure, albeit to varying extents across regions. Looking ahead, business conditions in the manufacturing sector are likely to remain unsatisfactory in many parts of the globe, including China, as depicted by recent PMI data. Nevertheless, encouraging trends have been evident in the manufacturing sectors of countries such as the US, Japan, India, Brazil, Canada and the UK over recent months. A dilemma facing several economies in these uncertain times is that companies are often unwilling to invest in new production capacity or in expanding existing facilities, despite possibly having the capital to do so. For instance, the cash reserves of non-financial corporations in the US are estimated to exceed USD1.7 trillion. Major corporations in Europe and elsewhere are also keeping substantial capital holdings, thereby constraining investment, employment and therefore overall growth prospects. Worsening global conditions have also been reflected through a visible slowdown in trade flows, with growth in world import volumes decelerating to 5.8% in the year to November 2011, from 14.5% in 2010. As illustrated below, the emerging Asia region still managed to command relatively strong demand for imports, with China being a key contributor, but growth in import demand from the Eurozone and the US declined sharply in 2011.

Economic overview

A key challenge in many parts of the world has been insufficient employment creation, despite a sustained economic recovery over the past two years. The United Nations estimated the global shortfall in 2011 to be in the order of 64 million jobs, when employment levels are compared to those prevailing before prior to the crisis. Although the tide appears to be turning in certain cases, progress is yet very slow. The US economy expanded employment throughout 2011 and Germany is experiencing solid employment gains, with its unemployment rate having fallen to the lowest level in more than 20 years, at 5.5% by last December. A number of emerging and developing economies are also showing varying degrees of success in providing additional job opportunities. Globally, labour productivity growth slowed to 2.5% in 2011, from 3.7% in the previous year. Advanced economies, in particular, experienced substantially lower rates of increase in labour productivity, but some moderation was also reported for certain emerging economies. Inflationary pressures could subside to some extent in 2012, as demand conditions weaken and commodity prices possibly continue on a declining trend, although the recent movement in the oil price is providing reason for concern. In advanced economies, interest rates will most probably remain at historical lows for quite some time, with the US Federal Reserve having recently indicated such an intention until late in 2014. The sovereign debt crisis in the Eurozone and the identification of lasting solutions with a degree of urgency dominated the agenda at the Davos meeting of the World Economic Forum towards the end of January 2012. Concerns were repeatedly voiced over the serious threats to the global economic recovery and its sustainability. Prospects for the world economy have dimmed as downside risks GDP growth around the globe: 2011 estimate and two-year forecast increased. Growth projections by Country / Region IMF World Bank United Nations the International Monetary Fund, 2011e 2012f 2013f 2011e 2012f 2013f 2011e 2012f 2013f the World Bank and the United 3.8 3.3 3.9 3.7 3.4 4.0 3.7 3.6 4.1 Nations range from 3.3% to 3.6% World for 2012, with some acceleration Advanced economies: 1.6 1.2 1.9 1.6 1.4 2.0 1.3 1.3 1.9 1.8 1.8 2.2 1.7 2.2 2.4 1.7 1.5 2.0 anticipated in 2013 (refer to United States Euro area 1.6 -0.5 0.8 1.6 -0.3 1.1 1.5 0.4 1.3 adjacent table). The first two Japan -0.9 1.7 1.6 -0.9 1.9 1.6 -0.5 2.0 2.0 multilateral institutions expect a 6.2 6.4 5.9 6.0 5.4 6.0 6.0 5.6 5.9 mild recession in the Eurozone in Emerging economies: China 9.2 8.2 8.8 9.1 8.4 8.3 9.3 8.7 8.5 2012, followed by a very modest India 7.4 7.0 7.3 6.5 6.5 7.7 7.6 7.7 7.9 recovery the subsequent year. Brazil 2.9 3.0 4.0 2.9 3.4 4.4 3.7 2.7 3.8 Challenges faced by the global South Africa 3.1 2.5 3.4 3.2 3.1 3.7 3.1 3.7 3.5 economy in 2012 and beyond Source: IDC, compiled from IMF, World Bank and United Nations data include: the urgent need to ensure greater stability and improved confidence in the financial system; the prevention of an uncontrolled debt default occurring in the Eurozones periphery and of minimizing adverse spill-over effects to other economies by creating firewalls, including support measures from the European Central Bank (ECB) and the introduction of the European Stability Mechanism, among others; focusing on issues concerning the labour market and, specifically, measures to enhance job creation worldwide; an emphasis on promoting improved international trade relations that will result in easier market access, whilst simultaneously encouraging increased investment flows. The economic woes in the worlds most industrialised economies will contribute to a slower growth momentum in some of the fast growing emerging economies, such as China, India and Brazil, particularly due to reduced external demand for their products and services, as well as more cautious portfolio and direct investment flows.
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Sub-Saharan Africa

4.9

5.5

5.3

4.9

5.3

5.6

4.4

5.3

5.0

Economic overview

However, their performance may also be aggravated by more subdued domestic demand conditions, some of which induced by governmental measures. Chinas growth decelerated from a high of 11.4% in the 1st quarter of 2010 to 8.9% by the 4th quarter of 2011. This was largely the result of deliberate efforts by the Chinese government to prevent the economy from overheating, especially the property sector, as well as to curb inflationary pressures. Expectations of economic growth in China have been revised downward due to weaker global conditions, with the IMF placing it at 8.2% for 2012. Nevertheless, such a growth rate is still above the 7% to 8% minimum range deemed essential to avoid social instability in this Asian giant. Should global economic conditions take a turn for the worst, however, or should local conditions in China not be as favourable as anticipated, social discontent may emerge. In this respect, consumer spending has slowed to pre-crisis levels as some of the government incentives have been withdrawn, although the 12th five-year plan aims to raise household disposable income levels. This could be achieved through governmental pressure on state-owned enterprises to lift wages, which could prompt private companies to follow suit. Furthermore, the Chinese government could reintroduce rebates on certain household purchases. Overall economic activity in India has seen a more marked slowing to an estimated 7.4% in 2011, compared to the 9.9% recorded in 2010. This has been attributed to subdued European demand for Indian exports as well as 13 interest rate hikes between March 2010 and October 2011. Demand conditions were further aggravated by weak public sector investment as well as limited political progress with respect to the required reforms. Growth is projected to moderate further in 2012, although the Indian government announced plans to raise economic activity (e.g. SOEs will be required to invest their cash reserves in the economy, especially in infrastructure, with the investment anticipated to total US$35 billion in 2012). The aim is to accelerate Indias growth to over 10% (a level recorded at the start of the 21st century). Inflation rates in excess of the 7% central bank target provide reason for concern. Non-food items have been the main drivers of price pressures. Moreover, the fiscal and current account deficits continue to constrain economic activity. Growth in Brazil decelerated substantially to an estimated 2.9% in 2011, from 7.5% a year earlier, with the projection for 2012 being only marginally higher at 3%, according to the IMF. Capital formation slowed dramatically in 2011, with the third quarter reporting only a 2.5% increase compared to rates of over 20% for most of 2010. As a substantial commodity producer, Brazil is expected to be adversely impacted by the global slowdown, while rising levels of default on consumer loans reflect challenging demand conditions locally. The negative factors are somewhat offset by the decline in inflation, which has prompted the Brazilian Central Bank to start easing rates towards the end of 2011, as well as some tax relief. Concerns are also being raised over the ability of state banks to sustain their high levels of lending, since the outlook for the economy and demand conditions are less favourable. The Brazilian government, in turn, is yet to make the tax and other legislative reforms deemed necessary to unlock the countrys growth potential.

Economic overview

3.

AFRICAS GROWTH PROSPECTS

Notwithstanding various shocks experienced during the course of 2011, including political turmoil in certain countries, high and volatile food and fuel prices, droughts and famine, as well as heightened levels of uncertainty globally, Africa as a whole managed to post 2.7% economic growth according to the United Nations. Continental growth was dragged downward by North Africa, which witnessed a 0.5% decline in GDP, with Libyas economy estimated to have contracted by more than 20% in 2011. In contrast, the recovery momentum was sustained in Sub-Saharan Africa (SSA), with the latest UN estimates pointing to a 4.4% expansion in 2011. Accordingly, SSA was one of the fastest growing regions in the world. Strong domestic demand and high commodity prices contributed to the regions economic performance, with energy and mineral exporting countries faring much better than others, owing to favourable terms of trade. As depicted in the table on page 5, the outlook for SSA remains relatively positive, despite slight variances in the forecasts from the three institutions. New mineral and oil developments and the associated investments, the likely expansion of infrastructure related sectors in various countries, a return of political stability in Cte dIvoire, as well as the expected rebound in three North African economies as increased stability sets in and/or reconstruction begins, should underpin growth this year and the next. Based on the World Banks latest forecasts, real GDP growth in SSA is expected to come in at 5.3% and 5.6% in 2012 and 2013, respectively. However, the outcomes will differ significantly across the continent, with Sierra Leone and Ghana expected to record the fastest growth in 2012, whilst the lowest available forecasts pertain to Swaziland and Egypt. Moreover, the downside risks have risen considerably in recent months due to external factors. A marked downturn in the global economy and the continuing sovereign debt crisis, which is affecting several European economies, would have serious implications for Africas economic performance through trade, investment and financial linkages, among others. External accounts and the fiscal space of numerous countries could be significantly affected, especially those that are highly dependent on the European and US export markets, or on commodities that would be most vulnerable to weakened global demand. Furthermore, more pressing issues in advanced economies, such as budgetary constraints, public sector over-indebtedness and austerity measures are likely to result in reduced official development assistance to most African beneficiary countries. Migrant worker remittances and foreign direct investment flows may also come under pressure.

Economic overview

4.

ECONOMIC DEVELOPMENTS IN SOUTH AFRICA

Facing relatively unfavourable global economic conditions, local manufacturing production increased by 2.5% in 2011, that is half of the 5% growth performance recorded in 2010. Nine out of ten manufacturing divisions reported an expansion in output last year. Key contributors were motor vehicles, parts and accessories as well as other transport equipment, whose production expanded by 7.7%, contributing 32% to the overall increase in manufacturing output. This was followed by basic iron and steel, non-ferrous metals, metal products and machinery, whose combined production rose by 2.8% and represented almost one-quarter of the overall expansion in manufacturing output. The Kagiso Purchasing Managers Index (PMI), which is regarded as a leading indicator of manufacturing sector trends, expanded handsomely in January 2012 to 53.2 index points, surpassing consensus expectations. This reading was largely supported by the new sales orders index, which rose to a seven-month high, as well as an optimistic view regarding expected business conditions. The effect of a sluggish global economic recovery on demand for minerals was evident in 2011. The volume of mining production in South Africa contracted by 5.1% in the 4th quarter of 2011, relative to the corresponding period a year earlier. Notable contractions were recorded by the platinum group metals (-14.4%), diamond mining (-13.9%) and non-metallic minerals (-9.8%). For 2011 as a whole (refer to the graph below), mining production contracted by a marginal 0.1%, largely due to reduced output of diamonds and gold.
30 20 10

Mining production by sub-sector


57% 56%

% Change (y-o-y)

0 -10 -20 -30


2009 2010 2011

-40
Total mining Platinum Gold Coal Iron ore Chrome Copper Manganese Nickel Other Building Other metallic materials nonminerals metallic minerals

Source: IDC, compiled from Stats SA data

Although retail trade sales were rather weak in the first half of 2011, largely as a result of industrial action and the high base effect related to the 2010 FIFA World Cup, a strong rebound was seen in the second half of the year, most notably in August to October. This was supported by an improvement in consumer confidence following substantial remuneration increases in the public sector, as well as low interest rates. Nonetheless, real growth in retail sales moderated in November as demand for clothing, footwear, textiles, furniture and appliances softened.

Economic overview

In the months ahead, growth in sales of durable and semi-durable goods is expected to moderate, whilst that of non-durable goods is likely to stay robust. Wholesale trade sales remained solid over the first eleven months of 2011. Growth was largely driven by demand for solid, liquid and gaseous fuels and related products, as well as by sales of agricultural raw materials and livestock. Sales of construction and building materials boosted the revenues of builders traders. However, wholesale trade sales moderated considerably in November. As illustrated below, overall business confidence remained weak in the closing quarter of 2011 as concerns escalated over the repercussions of the European sovereign debt crisis. Motor traders and manufacturers became increasingly pessimistic as the year progressed, whilst the troubled construction sector has reported poor sentiment for 15 successive quarters.
Business confidence in the South African economy
Q1 2010 Q2 2010 Q4 2010
Q2 2011

100 90 80 70

Q3 2010
Q1 2011

Q3 2011

Q4 2011

Index

60 50 40 30 20 10 0
Retail trade Wholesale trade Motor trade Building contractors Manufacturing Total BCI

Source: IDC, compiled from BER data

On a positive note, consumer oriented sectors such as the retail trade reported an improvement in confidence levels in the last quarter of 2011. A low interest rate environment and higher nominal income levels are expected to support consumer demand in the coming months, albeit at a more moderate pace. On the external front, South Africas trade balance rebounded to a surplus of R4.7 billion in December 2011, from deficits of R9.6 billion and R8 billion in October and November respectively. Nevertheless, a large deficit amounting to R15.1 billion was recorded for 2011 as a whole, compared to a surplus of R4.8 billion in 2010. This was largely due to strong import demand associated with a recovering domestic economy, which outpaced South Africas export performance despite a 17% depreciation of the rand on a trade weighted basis over the course of the year.

Economic overview

Total employment in the last quarter of 2011 increased by 179 000 on a quarter-on-quarter basis, reducing the unemployment rate by 1.1 percentage points to 23.9%. The sectors recording the largest gains were community and social services (66 000 additional jobs), manufacturing (+52 000), and the trade sector (+48 000). However, the construction and financial services sectors each recorded job losses in the order of 29 000 over this period. On a provincial basis, Gauteng, KwaZulu-Natal and the Western Cape recorded the largest employment gains. Approximately 365 000 additional jobs were created in 2011 as a whole, with the finance and other business services sector claiming the largest gains (+145 000), followed by the trade sector (+85 000) and community services (+76 000). Only the utilities sector recorded job losses (-13 000) during the year. Although the overall net jobs created in 2011 fell short of the government target of 500 000 per annum needed to add 5 million new employment opportunities by 2020, the recent trend is most welcomed. However, considering the fragility of the economic recovery and the high levels of uncertainty prevailing globally, it is critical that employment creation be sustained. Increased investment activity by both the public and private sectors will be essential in this regard, maximising local procurement where possible. The revised Preferential Procurement Policy Framework Act, which became effective early in December 2011, is expected to support the expansion of local production capacity and, consequently, job creation. The Presidents State of the Nation Address emphasised the governments infrastructure programme aimed at boosting the extraction and beneficiation of the countrys mineral resources, as well as export sector development. The recently adopted mineral beneficiation strategy is expected to propel the development of downstream production. Eskom was also urged to seek options for a more affordable electricity pricing path, which would not only reduce the burden on the poor but also stimulate private sector investment, support economic growth and employment creation. Consumer price inflation has remained above the 6% upper target band since November, and is expected to average 6.2% over 2012. However, since it has been largely driven by cost-push factors, whilst economic growth remains inadequate, the Monetary Policy Committee is likely to keep the repo rate unchanged for quite some time.

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Economic overview

Economic outlook for South Africa


% Change
Economic variable Private consumption expenditure Fixed investment Exports Imports 2010 3.7 1.6 4.5 9.6 2011 e 4.9 4.4 6.1 9.8 2012 f 3.7 4.3 3.2 7.8 2013 f 4.3 5.8 5.5 10.0 2014 f 4.4 6.4 6.0 8.3 2015 f 4.1 6.2 5.3 6.5 2016 f 4.4 6.3 6.5 7.6

Real GDP growth


Current account balance (% of GDP) Inflation

2.9
-2.8 4.3

3.1
-3.4 5.0

2.8
-5.0 6.2

3.5
-5.7 5.7

4.0
-5.5 5.4

4.3
-5.1 5.6

4.2
-5.3 5.4

Source: IDC, compiled from SARB data, IDC forecast

The economic climate is indeed disconcerting at this point in time, largely due to circumstances beyond South Africas sphere of influence. The fact that it has taken an inordinate amount of time for the leadership of many advanced countries to identify concrete solutions to the serious structural challenges they face, places South Africa and other emerging or developing economies in a very vulnerable position. Accordingly, the countrys economy is expected to register a slowdown in growth to 2.8% in 2012, possibly accelerating toward the 3.5% level next year.

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